This Steel Market is All About Accessing Risk (and there is a lot of it)

A good example is the Section 232 investigation called for by the Trump Administration. A Section 232 investigation is supposed to determine how critical domestic steel is to the national security of the United States. The Department of Commerce is expected to finish the investigation sometime between now and the maximum allowable time which is 270 days. Comments have been attributed to Secretary Wilbur Ross that the investigation will be finished sooner rather than later because of the deep cache of antidumping and countervailing duty trade cases filed by the steel industry over the past few years.

There are those who are concerned about the Section 232 investigation. “There is a dark cloud hanging over this market,” is what one service center buyer said to SMU earlier today,“and it will continue until we hear about these trade cases.”

The issue the quoted service center has is that no one knows how this review will play out and what will happen to foreign steel should the government decide “something” has to be done to protect the domestic steel industry. What would that something be? How soon would it take effect? Who will be impacted? All of these are risks that buyers need to understand and try to control.

“All the mills want to talk about now is ‘Section 232’, and it’s starting to become annoying.” Said one large national service center to SMU late today, “They are pounding the drums and speaking as if the outcome in their favor is a foregone conclusion, and that buyers will be surprised when they can’t get all of the steel they need. There’s very little sensitivity or understanding being demonstrated by mill personnel (in public or in private), of the very real potential for negative impacts and fallout on users of metal in the U.S., depending on the outcomes of the cases. They seem quite myopic in their views which is unfortunate, as most in the collective industry understand and appreciate what true foreign dumping is, vs. a conjured-up need driven from an archaic law, to suit other purposes.”

Then we add into the mix the Circumvention Complaint against Vietnam/China on cold rolled and coated steels where, once again, there is no sure answer as to what conclusion the U.S. government will come to (risk). One of the key components to the Circumvention case is the long-standing international understanding known as “substantial transformation.” Substantial transformation is when substrate is converted through the rolling process to another product, thus changing the product reference code changes and, at the same time, the country of origin.

So, if Chinese hot rolled is converted to cold rolled or cold rolled to coated products the end product determines the country of origin.

Should the U.S. government rule that the cost and investment to produce the base substrate is significantly higher and therefore the country of origin would be the original manufacturer, it would turn the international trade community on its head. Oh yes, that means those end users who are purchasing foreign steel, either for competitive reasons or cost reasons, could be in for a huge surprise as well.

We don’t know if that is going to happen. The issue being discussed here is the risk that must be weighed by anyone doing business with Vietnam or any other country that converts substrate from countries with AD/CVD rulings against them.

Next, we have antidumping (AD) and countervailing duties (CVD) rulings already on hot rolled, cold rolled and coated products (risks that are somewhat better understood because decisions have been made). Those rulings have impacted imports of foreign hot rolled which have dropped dramatically over the past year. They have also impacted the price of domestic cold rolled and coated steels, allowing the domestic steel mills to collect an extra $100 per ton from all of their spot customers (the normal spread between HR and CR/Coated base pricing is $100-$120 per ton).

Then there is the question which we recently raised, how much inventory of carbon flat rolled is really being held by the U.S. service centers (another risk)?

A service center in the Southwest told us late this afternoon, “I’m struggling to read the market.  I heard lead times are out more then what I am seeing and I am not seeing the offers I have seen in the past so with that said, how is the market justifying the decrease in base for June from the mills?   Not that I’m complaining just struggling to understand the dynamics.”

The Southwest service center is not alone. From the Midwest we heard from a service center who told us, “Considering mills are attempting to maintain pricing structure it is amazing how quickly Service Centers are dropping prices below current replacement costs.”

A large service center in the Southeast said, “Lead times are pretty stable, but the level of mills willing to participate is really mixed.  Some of the mills are full and very bullish, largely due to their downstream operations.  That has left some gaps at other mills that we have to wait and see if energy fills.  Unfortunately, with automotive starting to slow down, and energy is waking up slowly, some mills are starting to get more aggressive.  However, aggressive pricing is not generating any business that we can tell – certainly not here.  We’re in a wait-and-see mode.” They then went on to say, “There are too many mixed messages in the market to get a strong idea about where things are headed.  Based on that, we are sitting on the sidelines – we’d rather miss a little downside than underestimate how far or the timing of when pricing will fall.  The market is going to soften, but we are still optimistic that the market won’t overreact.  Overall fundamentals are still relatively strong, and there are some good ‘events’ that could happen.”

There are more things that buyers need to consider: lead times, competitive pressures, inventory levels, how their customers are reacting to market events, how much steel is actually available and what are the “real” offers for pricing out there. All of these are risks that must be considered and buyers’ plates are full trying to figure it all out.